Margins likely to remain under pressure; FY20/21e EPS cut 9%; downgraded to ‘Reduce’ with TP revised to `6,501 from `6,814.
The 25% Y-o-Y dip in Maruti Suzuki India’s (MSIL’s) Q4FY19 Ebitda reflects our concern of a weakening revenue profile in a subdued demand and competitive environment. Hence, we revise downwards FY20/21e EPS by 9% each. As per our base case, Q4FY19 Ebit margin of 6.8% is an aberration and we estimate it to recover to 10.5% in FY20 and FY21. However, diminishing product excitement can continue to weigh on earnings in a weak demand environment. Hence, we downgrade to Reduce with revised TP of `6,501 (`6,814 earlier). Despite mere 10% FY19-21e EPS CAGR, we retain our target multiple of 22x core EPS acknowledging MSIL’s strong franchise and FCF. Discontinuation of a few of its diesel options (BS VI transition) sans a strong hybrid replacement could further dent volumes and margins.
Second quarter of margin pressure due to inventory clearance
Q4FY19 revenue at `207 bn (up 1% y-o-y) was ~2% above our estimate as realisations improved driven by sharp reduction in incentives (2% q-o-q). However, Ebit at `14.5 bn was 11% below estimate. Ebit margin at 6.8% was 180bps below estimate due to inventory reduction (50bps), ramp-up costs at the Gujarat facility (70bps) and adverse forex impact (60bps). With dealer inventory normalising (25-28 days), we expect margin to improve going forward.
Strong franchise, but dwindling product excitement
MSIL’s market share gains are likely to sustain riding an impregnable franchise and strong FCF & RoE. However, margin is likely to remain under pressure (versus FY17/FY18 levels) due to an unexciting product pipeline (versus recent past), weak urban sales (down 2% y-o-y in FY19), slowing rural growth (8% in H2FY19 versus 13% in H1) and uncertainty due to BS VI transition.
Outlook & valuation: Consolidation phase; downgrade to ‘REDUCE’
We estimate FY19-21 core EPS CAGR of 10.0% versus 28.5% over FY15-18. Given that MSIL’s valuations track margin, a persistent weakness in margin can lead to de-rating. We downgrade to ‘REDUCE/SU’ from ‘HOLD/SP’ with TP of `6,501, valuing it at 22x September 2020 core EPS plus cash per share of `1,417. At CMP, the stock trades at PER of 25.4/23.2x FY20/21e EPS.